In a widely anticipated report, the U.S. Department of Agriculture on Thursday cut its forecast for 2010-11 global wheat output by 2.3% to 645.73 million tons. That was lower than expectations and below recent estimates from the Food and Agriculture Organization and International Grains Council, which both saw the crop at 651 million tons. This is a surprising move from the USDA, which is traditionally more cautious in its crop adjustments.

Wheat-production forecasts have been slashed repeatedly since the middle of the summer, when the severity of record-setting heat and drought in the former Soviet Union became apparent.

Wheat prices hit nearly two-year highs on August 5 as Russia banned grain exports because of the drought, but prices have pulled back since then.

"USDA's data today only adds to the drama," said Bryce Knorr, analyst for Farm Futures. "The agency came in with a very low estimate of 2010 world production."

Soft red winter wheat for September delivery recently traded up 28 1/2 cents, or 4.1%, at $7.23 1/4 a bushel on the Chicago Board of Trade. That is down from the nearly two-year high of $8.41 but up 70% from a nine-month low in June.

Adding to the bullish fervor, Ukraine's state customs service on Thursday said it had blocked the export of more than 28,500 metric tons of wheat on two boats due to incorrect paperwork. Unlike Russia, Ukraine, also a big wheat exporter, hasn't put an official ban in place, but some analysts say government officials there are using bureaucratic means to slow down shipments overseas.

Prices may be able to top $8 again if Ukraine and neighboring countries join Russia in officially banning grain exports, said John Christopher, grain analyst at Linn Group, a brokerage. After announcing its export ban, Russia asked Belarus and Kazakhstan, its partners in a recently formed customs union, to halt grain exports, fearing that Russian grain would be exported via the two countries.

"The market's going to need another catalyst to really get it off and going," Christopher said.

U.S. wheat export sales for last week, issued Thursday, beat expectations at a hefty 1.3 million tons, an increase of 58% from the previous week, as importers turned to the U.S. from the former Soviet Union. Top buyers were Egypt, the world's largest importer, and Japan, a reliable U.S. customer.

Drought has prompted Egypt to start buying U.S. wheat after directing the bulk of its business to the former Soviet Union during the 2009-10 year, which ended at the end of May. The USDA on Thursday raised its forecast for 2010-11 U.S. wheat exports by 20% from last month to 1.2 billion bushels due to declines in foreign production.